Wall Street's Favorite Stocks: GM, ADT and More

By

Jack Hough

November 26, 2013

Order Reprints

Print Article

Text size

Among Wall Street analysts who cover Priceline.com stock, the average one predicts the stock will fetch $1,213 in a year. That would represent a meager gain of less than 5%. Yet analysts gush over the stock with 25 recommending investors buy it just three saying hold. None say sell.

That's an example of the often sloppy relationship between Wall Street's math and its recommendations. There are many ways to calculate price targets, from building complex models of future cash flows to simply comparing price-to-earnings ratios among peers. But the gains implied by the price targets ought to determine which stocks get Buy recommendations. Instead, analysts seem often to award Buys to popular, rising stocks, and then scramble to ratchet up their price targets to keep ahead of gains. The target for Amazon.com has risen in near-lockstep with the stock, doubling in three years. It implies only a 6% gain from here, but analysts overwhelmingly say Buy.

Judging by stocks in the Standard & Poor's 500 index, analysts seem almost indifferent about gains. Among 95 stocks that are projected to fall over the next year based on their price targets, the average recommendation is 2.66 on a scale from 1 (Buy) to 5 (Sell). For the rest, the average recommendation is only a little more bullish at 2.29.

The companies below were selected, not for their abundance of Buy recommendations, but for the gains implied by their price targets. For each, at least five analysts contributed price targets to form the average. And to weed out recent decliners, for which analysts haven't had a chance to lower their targets, we screened for stocks whose targets have been rising.

The U.S. Treasury says it will exit its remaining General Motors stake by year-end. That suggests taxpayers will recoup all but about $10 billion of $50 billion in bailout funds used to keep the company running through the global financial crisis. GM has dramatically reduced its costs and U.S. car sales have bounced back, but results in Europe are weak and improving only gradually. Next year, out from under government control, GM will be freed to put cash to use on share repurchases and the retirement of high-rate debt. Earnings are expected to jump 37%, to $4.66 a share. The stock sells for just eight times that figure.

GameStop shares have jumped 95% this year but still go for 12 times next year's earnings forecast, versus 15 times for the S&P 500. Last week, the company reported earnings that topped estimates amid a 22% rise in sales at longstanding stores, crediting the release of Grand Theft Auto V and new hardware from Nintendo. This quarter, result should get a lift from the first new Microsoft and Sony consoles in years. Crucially, those consoles use disc drives and don't restrict the resale of used games, a key business for GameStop. That suggests that, although games are likely to eventually transition to digital distribution, GameStop should enjoy at least 10 years of profit from them while transforming itself into a trading post for tablets, smartphones and other consumer electronics, according to Wedbush analyst Michael Pachter.

Halliburton's earnings could more than double over the next three years, to a range of $6.00 to $7.50 by 2016, from a consensus forecast of $3.12 this year, according to Credit Suisse analyst James Wicklund. That could make shares, recently $53, cheaper than they appear. At an investor meeting earlier this month, the company announced the successful completion of its past set of three-year goals and outlined some new ones. These include gaining market share in deepwater drilling, tripling revenues from mature-field operations and boosting profit margins, all resulting in returns on capital employed swelling to 20% from 11%. Halliburton also announced a 20% dividend increase, its second hike this year. Shares yield 1.1%. There should be room for more and larger dividend increased; the payments costs less than 20% of earnings.

ADT shares have sharply underperformed the market this year, losing more than 10%, yet earnings estimates for the company have recently creeped higher. ADT sells home security services and is pushing home automation and health monitoring services to spur growth. What all of these have in common is that they require a communication network, making them vulnerable to competition from phone and broadband companies, which have been adding their own home security offerings. At the same time, a rebound in the housing market is giving the broader industry a boost. ADT should be able to sell home automation services to half its customer base over the next five years, versus 7% earlier this year, according to Morningstar. It predicts that ADT's three-year contracts for security services, along with the hassle of installing new systems, will keep customer attrition in check. Shares go for 20 times earnings but less than 16 times free cash flow.

Best Buy stock rocketed from $12 to $44 this year before dipping to $40 following the company's third-quarter earnings report last week. Earnings beat forecasts but management noted that aggressive pricing during the holiday season could cut trim profit margins. At the same time, Wal-Mart lowered prices on certain electronics to match Best Buy's Black Friday pricing a week early. Longer term, Best Buy should continue enjoying the fruits of a turnaround effort focused on ecommerce, vendor partnerships, costs and price competitiveness, according to JPMorgan analyst Christopher Horvers. Shares go for 14 times next year's earnings forecast.

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.